This year has been the best for equity investors in primary market since 2010. All the initial public offers (IPOs) of 2012 are trading at a huge premium to their issue price. Only six companies dared the IPO market during the current year but even the lowest return given by any IPO among them is not less than 20%.
Companies listed this year on the main board of stock exchanges include Multi Commodities Exchange (MCX), National Building Construction Company (NBCC), Tribhovandas Bhimji Zaveri, MT Educare, Speciality Restaurants and VKS Projects. All these companies attracted large institutional investors. (See table for percentage gains of these companies from their issue price).
Market experts say, if any thing, Securities and Exchange Board of India's (Sebi's) strict post listing norms saved investors from losing their money in IPOs. The mad IPO rush of 2010-2011 saw investors losing huge money as little known companies were raising money and operators had a field day rigging their share price. However, after Sebi implemented new rules for IPOs at the start of this year, both promoters of small companies that lacked fundamentals, and operators stayed away from the market.
The overall loss to IPO investors during financial year 2010-2011 was estimated to be in excess of Rs 3,600 crore, excluding the gains from the Coal India issue. Nearly 70% of the 53 issues listed during this period fell below their issue price and majority of these companies were little known to the market.
"There is no denying that Sebi's new rules have dealt a major blow to IPO operators. This is one of the reason that many companies have postponed their IPOs and 2012 saw only a few good companies dare the market," said Kishor Ostwal, managing director of CNI Global Research.
As per new Sebi rules, a company which raised less than Rs 250 crore through an IPO now attracts circuit filter of five%. No speculative trading is allowed in the counter for the first 10 days and physical delivery is compulsory. For companies that raise more than Rs 250 crore, the stock attracts a 20% circuit filter on the price discovered during pre-open session. There is a pre-open call auction window for newly listing stocks between 9 and 10 am. This gives an idea to traders as to what would be the fair price of a newly listed company.
For many years, share price rigging of newly listed companies was a thriving business for some traders and brokers in the absence of any circuit breakers for scrips on the listing day. Promoters pre-sold their issue at a discount to grey market operators, who made quick exit from the counter post listing.
Often huge volatility made retail traders eager to make a quick buck bet on the counter, but they would invariably lose. First-day volumes in newly listed companies were over 10 times the total shares offered in most cases. This gave a clear indication of artificial trading.
Stock brokers in Mumbai and Ahmedabad, where a large number of manipulation cases have been detected, say circuit filter norms of Sebi were much feared. "No operator now wants to take a risk, as circuit filters would make it difficult for him to exit the counter at a decent profit. Manipulators knew that once the stock rose sharply, investors would be attracted and they could exit. However, now investors know the stock may not move up sharply due to circuit filters and they would not be attracted to companies that are not fundamentally sound to invest. This will improve the situation a lot," said a broker from Gujarat.
According to Prithvi Haldea of Prime Database, there is appetite for good IPOs and retail investors could return to market when they see that manipulation has come down and IPOs are trading fairly above their issue price. "Sebi's norms have curbed the malpractice but pricing of the company is still a key issue," he said.
IPOs between 2009-2011 performed worse than the broader market. Even if one looks at the number of IPOs that delivered positive returns, investors seem to have lost. The IPOs of RDB Rasayans, Gyscoal Alloys, Sea TV Networks, Tirupati Inks, Aster Silicate, Cantabil Retail, Commercial Engineers & Body, Tarapur Transformers, Microsec Financial, BS Transcomm, Servalakshmi Paper, Brook Laboratories, Bharatiya Global Infomedia and Midfield Industries were among the top losers. These fell 50-80% from their respective offer price. All these companies had raised below Rs 250 crore.